Morning Commentary: Junk sell-off underway; funds tracking possible $4 billion outflows

By Paul A. Harris

Portland, Ore., Feb. 27 – High-yield bonds, which generally held in during the first three sessions of widespread selling in the stock market, succumbed to selling pressure on Thursday, according to a bond trader in New York.

Selling was underway in most, if not all sectors in the high-yield index, sources said.

Among recent issues, the American Airlines Group Inc. 3¾% senior bullet notes due March 2025 (B1/BB-/BB-) were down 3½ points on the morning at 91 bid.

The $500 million issue priced at par a week ago.

The Endo Ltd./Endo Finance LLC, Endo Finco Inc. 6% senior notes due July 2023, which rallied Wednesday on news that the company was confident it had the financial flexibility to meet its liabilities related to opioid addiction settlements with states, cities and counties, were down 7 points on Thursday morning.

Fallen angel Kraft Heinz Co.'s bonds were down on the morning. The Kraft Foods Group Inc. 5% notes due June 2042 were down 1½ points to 2 points at 99 bid, according to the trader, who added that those bonds were trading above par on Wednesday.

The Kraft Heinz Foods Co. 4 3/8% senior notes due June 2046 were down 2 points on the morning at 91½ bid.

In the troubled energy sector, bonds of Chesapeake Energy Corp., which enjoyed an hour in the sun following a distressed exchange undertaken in December, fell 7 points on Thursday, the trader said.

Away from specific names, a full 35% of the high-yield energy sector is now trading in distressed territory, a market source said on Thursday.

The oil patch provided no help. The barrel price of West Texas Intermediate crude oil for April 2020 delivery fell 3.76%, or $1.83, to $46.90 on Thursday morning.

Meanwhile the new issue market was quiet on Thursday, sidelined by the broad-based capital markets volatility related to ongoing investor concerns about coronavirus.

Big outflows

The dedicated high-yield bond funds sustained huge outflows on Wednesday, according to a market source.

High-yield ETFs saw $1.87 billion of outflows on the day. That news follows on the heels of a report that the biggest high-yield ETF, $HYG, saw a record $1.57 billion one-day outflow on Tuesday.

Actively managed high-yield funds sustained $720 million of outflows on Wednesday, the source said.

As the market awaits the weekly report on capital markets cash flows from Lipper US Fund Flows, expected later on Thursday, the combined high-yield funds are tracking $4 billion of outflows on the week to Wednesday's close, the market source said.

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